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Study Session 9: Equity Valuation: Valuation Concepts

Forecast valuation derivative in DCF

I’m doing a DCF calculation but how can I forecast financial derivatives?
It currently has a fair value of -100. And -50 of this fair value expires next year, and -50 expires the year thereafter.

How can I forecast this, can I just discount the -50 cash outflows?


De-levering beta and levering back up using D/Enterprise Ratio

Hi All,

I saw a question somewhere once where it required me to de-lever a company beta and lever it back up to using a given Debt/Enterprise Ratio(instead of Debt/Equity ratio). Could somebody please explain how this is done. I can’t find anywhere in the equity book how to do this?

Thank you

Equity- Coglomerate Discount

Heyaz.. I have just recieved my Curriculum and just started reading by equity section. I came across a term named as Coglomerate Discount which means that the company who is in more unrelated business, market tends to apply discount on that stock of the company  in comparison to the stock of the company with narrow focus.

Some explanations were given like:

1. Inefficiencies in Internal Capital Market

2. Endegenous Factors

3. Research Measurement Errors

Fama-French Three-factor Model

a theoretical question: in the fama-french three factor model, we get required rate of return on equity from the following equation:

R= Risk-free rate + b1 * market risk premium + b2 * small-cap return premium + b3 * value return premium. Here, b stands for factor beta.

Intrinsic P/E vs Justified P/E

I bring this question up in response to CFAI 2011 PM Mock #57. In the book, they talked about justified P/E alot and importantly, always specified trailing or leading P/E. In this question they ask for the intrinsic P/E and do not specify. In the explanation they use the same equation as for justified forward P/E.   (1-b)/(r-g)

Does anyone know what the distinction is between justified and intrinsic or if we should assume forward P/E when it’s not specified?

Thank you

What is ROE?

According to Google “define ROE”:

“The mass of eggs contained in the ovaries of a female fish or shellfish, typically including the ovaries themselves…”

So my question is… which one of these is the correct definition?

A. ROE(2011) = Net Income(2011) / Book Value(2011)

B. ROE(2011) = Net Income(2011) / Book Value(2010)

C. Other: __________

Heads Up4: DDM or no DDM

Profitable company with earnings growing at 5% annually, pays a good dividend of $1.25 every year.  Would you use DDM to value the stock or not?  Why?

Heads Up3: Present value of the real cash flows

Nominal required rate of return 14%

Real required rate of return 8%

Present value of nominal cash flows discounted at 14%: Rs. 16.75 billion

Present value of real cash flows discounted at 14%: Rs. 12.25 billion

Present value of nominal cash flows discounted at 8%: Rs. 23.78 billion

The present value of the real cash flows discounted at 8% is closest to:

A. Rs. 14.06 billion.

B. Rs. 16.75 billion.

C. Rs. 23.78 billion